One key aspect of investment management often gets overlooked. When you have a variety of investment accounts with differing tax treatment, it can make a great deal of difference where you place which investments. At 228 Main, our portfolio management system enables us to choose our spots.
Roth IRA accounts have a wonderful attribute: used properly, you will never pay income tax on the gains made inside them. So when particularly dynamic investment opportunities arise, we prefer to place them in a Roth IRA bucket, when possible. There are no required distributions in later life, and heirs inherit Roths free of income tax.
Traditional retirement accounts like IRA’s and 401(k)’s are another category. Gains and portfolio income may not be taxed for years or decades into the future. This is called tax deferral, and is a powerful way to build your balances. (You or your heirs will pay the piper eventually.) Withdrawals are taxed as ordinary income, so preferential treatment on capital gains and dividends is not available.
Taxable accounts—your single or joint or revocable trust accounts—generate tax consequences year by year. You receive a Form 1099 listing everything each year. There are a couple of things to note, however. Capital gains and qualifying ordinary dividends are taxed at lower rates than ordinary income. And, there is no income tax on lifetime gains for assets held until death. So heirs get an income tax break.
Tax features of these different kinds of buckets are only part of the picture. Your need for current income comes into play, and other aspects of your situation. Unique portfolios for unique people—hey! What a great motto that would be.
Clients, if you would like to talk about this or anything else, please email us or call.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
No strategy assures success or protects against loss.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
